“When corporate tax bills are cut,”
Oxfam remarked matter-of-factly earlier
this month, “governments balance their books by reducing public spending or by
raising taxes such as VAT, which fall disproportionately on poor people.”
A 0.8% cut in corporate taxation across the
35 OECD countries between 2007 and 2014, the charity pointed out, was
accompanied by a 1.5% increase in the average VAT rate. VAT (or sales tax in
America) is a flat ‘regressive’ tax. When you buy a packet of chocolate
digestives you pay the same amount in tax as Richard Branson, Rupert Murdoch or
Bill Gates. This switch is, quite simply, a huge redistribution of wealth from
poor to rich.
But while corporation tax has been
reduced across the world in response to economic crisis and has been heading
resolutely southwards ever since the 1980s, we are about to see corporate tax
cuts on monster truck tyres. Donald Trump wants a US corporate tax rate of 15%
compared to the current 35%. Theresa May’s ambition meanwhile is for the lowest corporate tax rate in the G20 (lower than
Trump’s America, in other words, which is in the G20). Britain’s corporate tax
rate is 17%, 11 percentage points lower than when the Tories took office in
2010 (the previous Labour government also reduced it).
This is the other arms race. Except in
this one, governments fight to give money away, not accrue weapons.
I could spend paragraphs fulminating
about the injustice of continually cutting taxes for the richest people on the
planet while the poorest shoulder all the pain of a policy designed to repair
the damage caused by a financial crisis they weren’t responsible for. I could
waste energy pointing out the bizarre logic of claiming to cut a government
deficit by deliberating slashing your income. But I’ll content myself with one
salient fact – corporate tax cuts are presented as invigorating the economy, freeing
more money for investment and jobs. They’re about making Britain ‘super
competitive’, proclaiming we’re open for business, increasing research and
development spending blah, blah, blah. But on that score, they’re a spectacular
failure. An unexpurgated flop. But it’s
a failure almost everybody manages not to notice.
The
fallacy
Because corporation tax cuts do not
stimulate investment. Quite the opposite.
According to economist
Michael Burke the private sector investment ratio in Britain (gross fixed
capital formation as a proportion of firms’ operating surplus,) peaked at 76%
in 1975, dropping to just 53% in 2008. By 2012, it had plummeted to 42.9%. By a
strange coincidence in 1975 corporation tax in Britain, at 52%,
was the highest it’s ever been. That’s at the same time as the peak in the
investment ratio. In 2008 the corporate tax rate was 28% and in 2012, 24%.
According to Burke, corporation tax cuts
are based on the ‘fallacy’
that they will ‘spur investment’. The investment rate has fallen by around
a third in Britain since 1970, the same period that has seen corporation tax
cut by more than 50%.
Other countries paint a similar picture.
The investment ratio in the US peaked in 1979 at 69%. In 2008 it was 56% and it
declined further to 46% in 2012. In Canada, which has undergone three
waves of corporate tax ‘reform’ since the ‘80s, business investment has
fallen steadily for two decades. In the words of one economist, Michal
Rozworski, “For every dollar
earned before tax, only about 60 cents goes back into maintaining and expanding
business capital. Compare this to 80 or more cents just a decade ago.”
But the political class
of the western countries refuses to see the obvious. Decades of evidence that
corporate tax cuts don’t work in the
sense of producing more private sector investment, are met with renewed
determination to institute even more drastic reductions. Even business seems to be saying, 'enough is enough'.
As Burke points out, a
dynamic capitalist economy could well produce an investment ratio of over 100%,
financed by borrowing in the expectation of greater profits in the future. So 69%
(the US 1979 peak) is nothing to write home about, and 46% is “a sign of
enfeeblement”.
The cash mountain
One rather glaring
indicator that a further corporate tax giveaway won’t generate new streams of
investment is that the corporate sector is already sitting on a mountain of
cash that it is not using. Worldwide, this unused mass of money was estimated
at $7 trillion in 2014. This year non-financial US corporations alone were judged to have $1.68 trillion in spare cash. All this while ‘underinvesting’ is the order of the day and there is pressure
from shareholders to increase capital expenditure.
Apart from sitting in
bank accounts, where does this mountain of cash go? The answer is in increased
dividends to already bloated shareholders (which may be other companies), in share buy backs so that the company, in stock market terms,
appears much healthier than it actually is, or in acquiring other companies. So
the corporate sector comes across very active (mergers and acquisitions are at
an all-time high), but this fevered activity just worsens inequality and
increases the value of assets while producing very little of worth to society.
Actual investment – new products, new machinery, new workplaces – is frequently
perceived as too risky.
One theory that may
tentatively rear its head at this point is that there is a negative correlation
between reduced corporate taxation and investment – in other words, higher
corporate taxation (and it was much
higher in previous decades) is actually responsible, in some little known way,
for greater levels of investment. The anthropologist David Graeber goes some
way down this path in his essay Of Flying Cars
and the Declining Rate of Profit, suggesting that the heyday of corporate research in the 1950s and ‘60s
was really the outcome of high rates of tax – companies preferred to divert
money into research, investment and rising wages rather than seeing it
appropriated by the government. When that environment was transformed in the
tax cutting, deregulating ‘80s and ‘90s the incentive, so to speak, for research
and investment vanished.
“In other words,”
writes Graeber, “tax cuts and financial reforms had almost precisely the
opposite effect as their proponents claimed they would.”
Apple won’t make those ‘darn computers’ in
America
Donald Trump’s
proposed tax holiday for US multinationals repatriating cash gives credence to
what Graeber is saying. Prior to 1986, corporations had to pay a 15% tax
penalty for hoarding cash. Under Ronald
Reagan, though, multinationals were allowed to hold unlimited amounts of cash
provided they did so overseas. This produced a huge influx of money into tax
havens. Rather than reinstituting the penalty on squirrelling away profits in
other countries, Trump is proposing reduced taxation on repatriated cash as a
way of incentivizing investment in manufacturing. The last time this trick was
tried (under George W Bush in 2004), more than 90% of the repatriated money was used for share buybacks, increased dividends and
larger salaries for executives. Another example, if one were needed, of
corporate tax cuts having an altogether different effect to the one advertised.
But I think we have to
look further than Graeber’s implicit suggestion that higher corporate tax is
integrally linked to higher levels of private investment. If corporations are
actively preferring alternatives to investment, such as share buybacks, bigger
dividends or hoarding cash, the question is why has investment become so
unappealing? Why has capitalism, which presents itself as a the apogee of a vigorous
system transforming the world for the better, become so feeble?
Part two to follow
